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DBSA to increase infrastructure delivery support to municipalities

Municipal sector already accounts for 29% of DBSA’s R90bn loan book.
DBSA's Mohan Vivekanandan.Image: Supplied

The Development Bank of Southern Africa (DBSA), which last month provided a R3 billion loan to the City of Johannesburg (CoJ) and R1.5 billion to City of Tshwane (CoT) to support infrastructure development in these metros, plans to increase the infrastructure delivery support it provides to municipalities.

The disbursements to the CoJ and CoT supplement the government’s massive infrastructure expenditure programme to stimulate the economy post Covid-19, with the first 50 out of 276 strategic infrastructure projects (SIPs) worth R360 billion.

DBSA Group Executive: Client Coverage Mohan Vivekanandan said the bank already provides lending support to eight metros and 87 of the more than 250 municipalities in South Africa, with the municipal sector accounting for 29% of the DBSA’s about R90 billion loan book.

Vivekanandan said this week the DBSA is also providing non-funding support and technical assistance services on a grant basis to municipalities it may not lend money to because they might not be in a financial position to borrow and the DBSA did not want to engage in any reckless lending.

This includes technical assistance with project preparation and master plans for water, sanitation, electricity, roads and stormwater projects as well as for other infrastructure investments, which still helps these municipalities to access funds to deliver infrastructure, he said.

Vivekanandan said this assistance is important because many of the most poorly-run municipalities are most urgently in need of investment in infrastructure; the capacity-building and training provided by the DBSA ensures these municipalities are better equipped to handle service delivery to their communities.

The Auditor-General reported in July 2020 that only 20 of the 257 municipalities achieved clean audits in the 2018/2019 financial year, 33 got disclaimers and the audit outcomes of 76 municipalities regressed in the past three years, with only 31 improving.

In addition, 91% of the municipalities did not comply with legislation and irregular expenditure increased to R32.06 billion from the R25.2 billion reported in the previous year.

Vivekanandan said the DBSA is also working with the provincial Department of Cooperative Governance and Traditional Affairs and has established a provincial project management unit to help coordinate some of the technical services and support “so there is a level of oversight” at municipalities.

He said 5% to 10% of the capital cost of a project can easily be spent on doing the technical feasibility, environmental and legal studies and, in many instances, smaller municipalities may not have this money.

“With the DBSA providing them with that support, it allows them to get access to the municipal infrastructure grants provided by National Treasury.

“But to get those infrastructure grants, you have to go to National Treasury with a very credible plan and good quality projects.

“If you don’t have the capacity to develop that plan and do that project preparation work, you won’t be able to access that municipal infrastructure grant. This is one of the reasons why municipalities underspend on the infrastructure grants that are provided to them,” he said.

Vivekanandan said the DBSA definitely looks at issues such as good governance and clean audits at its municipal clients and state-owned entities, including the income statements, balance sheets and cash flows of these clients, because this was what will enable them to repay loans.

He said the DBSA did not have any significant problems with its municipal clients, adding its non performing loans as a percentage of the DBSA’s total municipal loan book is low.

Vivekanandan declined to provide more specific comment on this issue because the DBSA will be releasing its financial results next month, but stressed that infrastructure as an asset class generally tends to have lower non-performing loans ratios than other asset classes, such as mining or manufacturing.

“In that sense, it’s generally a better and safer sector that we are participating in and we’re funding real assets.

“It’s about having a balance and maintaining a low and prudent level of non performing loans. But as a development bank you are supporting loans with longer tenures, possibly with greater levels of risk, and some of the commercial banks aren’t in that space.”

However, Vivekanandan stressed the DBSA did not want to measure its impact simply in terms of its lending.

The DBSA is involved in a lot of different programmes that help to unlock infrastructure, he said. This week it signed a Memorandum of Agreement to manage the Infrastructure Fund on behalf of National Treasury and the Presidency.

The Infrastructure Fund has R100 billion of blended finance from the public and private sector for infrastructure projects.

Vivekanandan said development banks, not only in South Africa but globally, have in the past five years been trying to move towards acting as a catalyst to unlock projects and make them bankable rather than just providing money directly for infrastructure.

He said the DBSA, for instance, set up and supported a project management office for Independent Power Producers (IPPs) and has been working with the state-owned Trans-Caledon Tunnel Authority (TCTA) on the preparation of a few of the TCTA’s projects to get them to the “bankable feasibility stage”.

“In many ways, that is something the commercial market is generally not willing to do because of the high level of risk involved. But once you get a project to bankability [stage]…  the banks and institutional investors will put their own money in there. It’s getting it to that stage that is really crucial,” he said.

Vivekanandan said the Independent Power Producer (IPP) programme is a perfect example of this.

More than R200 billion of capital expenditure has gone into the IPP sector in the last 10 years and 90% plus of this investment is from the private sector, including significant amounts from equity investors from overseas, he said.

Construction market intelligence firm Industry Insight described the R4.5 billion in loans granted by the DBSA for infrastructure in Johannesburg and Tshwane as “encouraging news”.

However, Industry Insight it came as major multi-billion rand capital programmes with the private sector are being reconsidered, including R5 billion by South African Breweries, while Heineken announced it will be shutting down operations in South Africa and cancelling the R6 billion production facility that was to be developed near the Dube Trade Port.

“The net effect thus remains negative, as the DBSA’s R4.5 billion pales by comparison to the already R11 billion lost in planned private sector investment,” it said.

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Loans, loans and even more loans. Might be forgiven to think it is endless.

Ready, steady,……….. LOOT!!!

More sovereign debt

It is evident in some areas that the cost of living in your own house is not sustainable and making debt does not help.

Municipal charges just keeps going up way above inflation. This is one of the biggest risks to the economy. Never any though given to cutting cost. It will implode.

Many will be moving to smaller towns. Working from home you know.

Durban is the worst.

Municipalities have always made use of loans to finance infrastructure projects. Cash flow analysis
I have done on infrastructure projects showed that it has a negative cash flow for about seven years, then the cash flow becomes positive and it reaches a break even point about 14 to 15 years after commissioning. From there it contributes to the “surplus” of the municipality. It is therefore the older infrastructure that produces the cash and actaully “carries” the new infrastructure. For this to be sustainable, the
old infrastructure must be maintained properly. This is unfortunately not the case any more, which causes the municipalities to run into a debt spiral. Institutions that are considering loans to municipalities should actually take a good look at the maintenance program of the existing infrastructure. If that is poor, the capacity to raise revenue is under threat and the risk to grant a loan increases dramatically.

Maintenance is a western concept. Maximise the employment of loyal voters and patronage networks is the priority. Maintenance means having to allocate responsibilities. Yet another western concept. “Poor” is the norm for maintenance I fear.

You are treating the symptoms and not the cause of this malaise.
Municipalities are poorly staffed and resort to ” consultants ” to do the work of employees. Nevertheless the looting continues unabated. Get rid of the Councillors, City Managers, Mayors and BEE. Then and only then, there may be hope.

That is unfortunately a pipe dream. You will have to amend the Constitution to achieve that and that will not happen. We must work on the things we can change and if the DBSA can help municipalities to tighten up their maintenance programs, it will make a huge difference. I know. Been there, done that!

Quote the paragraph where it states that raced based employment is condoned AND that people who are not doing their job are protected from being dismissed?

You are confusing the Constitution with ANC party policies…

Etienne, my reference to the constitution was in reply to Taffydee’s comment to get rid of councilors, mayors, etc. Go read Chapter 7 of the Constitution and you will see that all those positions are enshrined in the constitution. They will not go away without amending the constitution. My aim with my comments is to add a positive contribution to the debate, highlighting that it is senseless for DBSA to give loans for new infrastructure if they don’t put pressure on the municipalities to ensure that the old infrastructure is maintained. I did not defend any ANC policies or any of the things you refer to, so keep the cheap shots for someone else, please.

I interpreted the statement of:
“Get rid of the Councillors, City Managers, Mayors and BEE.“

To mean to get rid of the inefficient, underperforming and or derelict in those positions. If you read the statement as that… then his comment is positive and your comment is negative and useless.

Oh, that Colgate smile.

This, too, will go horribly wrong – soon.

I will say it again – make the counselor positions honorary again, with no pay. You attract a much better class of counselor, that puts the interests of the people first.

It worked well pre 94.

I don’t recall any time in history that councillors worked for free?

Where and when?

DBSA is naive or deliberately ignorant; if municipalities used these loans for infrastructire why do so many need fresh water deliveries by trucks?
Why all the issues around expensive power – loan money can enable them to develop alternative energy options away from Eskom so they can join Cape Town – the city which already did this – in demanding that Energy minister Mantashe signs the necessary documents for this energy to be unlocked
But municipalities award tenders for infrastructure projects – probably with DBSA money – but when the auditor general does an inspection of the project after the completion date, theres only a couple of poles knocked into the ground by the contracted who has long since made a duck with the money (paid in full by the municipality) and most likely with a fat kickback to relevant municipal officials…

I also used DBSA loans for infrastructure projects in the municipality I worked for. At the time they had very well qualified project facilitators (my facilitator had a Ph D) who regularly visited the projects and the money was made available as the project progressed. I hope they still have a monitoring system in place.
And yes, we did complete the projects, missed out on the kickbacks and paid back the loans.

You were obviously efficient and skilled in your job – many municipal staff are not.

In 2016 the DBSA raised its provision for impaired accounts by 30% to something like R35bn. Wonder why…?

End of comments.

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